“Gentle Downward Trend” Predicted for UK Insolvencies

RSM have reported that not only have UK insolvencies dropped by 5% for Q3, but that a forecasted further fall in numbers for Q4 is likely. The accountancy professional services network has shared the findings from its own Insolvency Predictor, which reveals that a “gentle downward trend” may start to show by the end of the year.

This predicted drop in numbers is in spite of several significant headwinds in the shape of the cost-of-living crisis, high interest rates, the Russian invasion of Ukraine, and other economic difficulties. Gareth Harris, Partner at RSM, explained that while “fewer insolvencies is a step in the right direction […] the drop is likely to come mainly from a fall in ‘shut down’ creditors’ voluntary liquidations at the smaller end where the catch up from COVID and government support has been flushed out”.

He noted that “sticky inflation, high interest rates coupled with an increase in debt, and the cost of living are still making it tough for businesses to recover post-COVID”. Looking ahead though, Harris seemed more optimistic, and added that “we predict that shut-down liquidations have now peaked, and we anticipate an increase in corporate rescues and administrations as directors and stakeholders seek better solutions”.

RSM’s Insolvency Predictor is a tool that utilises a mix of historic insolvency data and ‘key economic indicators’ to create insolvency forecasts and identify emerging trends. If its findings are to come to fruition, then we can expect to see the number of distressed businesses drop by 10% by the end of the year “to around 5,700 businesses”.

While a drop in the number of corporate insolvencies is certainly welcome, these figures must also be read with previous reports in mind. Indeed, it’s difficult not to record fewer insolvencies than Q2’s bruising numbers, which sat a sky-scraping 52% above historic averages. The figures may well have dropped recently, but because they’ve fallen from such a high point to begin with, they still make for some sobering reading.

Hopefully though, we’ve already seen the worst when it comes to the number of insolvencies over the last few months, and a steady return to more normal levels can resume. It’s possible that because economic conditions have been so difficult recently, it not only wiped out any companies that were already due to fold, but also those that might have otherwise limped on for a few more months.

Harris warns that “the current economic headwinds and macro uncertainty could lead to more turbulence next year”, and it’s difficult to see any change on that front in the short term. The economic landscape looks to be as difficult for businesses to navigate as ever, but if those in the weakest positions have already fallen, perhaps insolvency figures can steadily improve as RSM’s Insolvency Predictor has forecasted.

As Harris stated, this year has seen the end of COVID-19 support schemes for many companies too. If the withdrawal of that particular financial crutch has been a deciding factor in some companies folding, that too could have contributed to Q2’s peak, and may hopefully mean that there are fewer insolvencies on the horizon.

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